Introduction

Instructor: Paulo Fagandini, PhD
📧 EMAIL HERE

Official source of material and communication: CANVA HERE

Bibliography

📖 Shapiro, D.; MacDonald, D.; Greenlaw, S. A. (2022). Principles of Economics 3^e. OpenStax.

This book is free and you can get it from https://www.openstax.org.

Assessment

There are two ways to pass this course:

1. Continuous assessment
2. Final Exam

Continuous Assessment

• Two midterms, 50% each, multiple choice and written questions (with computations and drawing graphs).
• Minimum grade of 8.00 in each test.
• At least 70% attendance.

Final Exam

A single written exam, covering the whole semester worth 100%. Needs a grade above 10 (out of 20) to pass.

Study Economics… Why?

• 🏛️ Understand the Government and its economic policies
• 🗺️ Understand the Global Market and its implications for companies
• 💰 Because we aspire to financial success and business prosperity
• 📊 Mastering the supply and demand mechanisms is fundamental for efficient management
• 🧑‍🏭 Understand income inequality and its impact on the labor market and companies

Study Economics… why?

Key concepts that will appear during any manager’s career:

• Budget deficit
• Inflation
• Unemployment
• Taxes

But what is Economics?

• Economics comes from the greek “oikonomia”
• Two roots: oikos which translates to household, and nomos with is something like management.
• When you talk about political economics remember that polis in Greek was the citi-state: the state management.

Economics nowadays

To manage efficiently a system you need to know how it works! For this we study:

• The influence of institutions over resource allocations.
• Financial markets and capital allocation.
• Income distribution and efficient ways of social support.
• Economic cycles and monetary policy.
• International trade, finance and the effects of globalization.
• Economic growth in developing countries.
• How government policies can be used to achieve its goals.

Economics vs The Economy

While Economics is a discipline, the Economy is a system, the whole set of agents interacting according to some pre-established rules.

Economics

1. In sum, economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions, or societal decisions.

2. Scarcity means that human wants for goods, services and resources exceed what is available.

Economics in the Social Media Age

Economics is greatly impacted by how well information flows through society. After all, the more and better information we have, the better decisions we can make.

Tiktok, Meta, X, etc. have a huge role (and grip) in the information highways these days!

Scarcity

It is easy to verify that scarcity is a characteristic of our economies:

1. On the one side, it is easy to observe people who has many needs (food, shelter, etc.)
2. On the other side, even people with its basic needs covered, will justify the need for more (education, personal fulfillment, etc.)

Comprehensive Study of Economics

Division and Specialization of Labor

This is the way in which different workers divide required tasks to produce a good or service.

Why the Division of Labor Increases Production?

• Dividing and subdividing the tasks involved with producing a good or service, produces a greater quantity of output.

• Specialization - when workers or firms focus on particular tasks for which they are well-suited within the overall production process.

  • Specialization allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

Micro vs Macro

Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes.

1. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.

2. Macroeconomics is the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance.

Theories and Models to Understand Economic Issues

Theories and Models to Understand Economic Issues

• A theory is a simplified representation of how two or more variables interact with each other.
  • A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.
• Economists use models to test theories. They help us simplify reality to isolate the core issue at hand.

A simple model

• The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market.
  • The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them.
  • In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.

Theories and Models to Understand Economic Issues

flowchart LR
    H[Households] 
    F[Firms]
    
    F -->|A: Goods and Services| H
    H -->|B: Payment for Goods and Services| F
    H -->|C: Labor Services| F
    F -->|D: Wages, Salaries and Benefits| H
    
    %% style H fill:#e1f5fe
    %% style F fill:#e8f5e8

An Overview of Economic Systems

There are at least three ways that societies organize an economy:

1. Traditional economy - typically an agricultural economy where things are done the same as they have always been done.
   • Oldest economic system
   • Used in parts of Asia, Africa, and South America
   • Occupations tend to stay in the family
   • What you produce is what you consume
   • Little economic progress or development

An Overview of Economic Systems

2. Command economy - an economy where economic decisions are passed down from government authority and where the government owns the resources.
   • Government decides what goods and services will be produced and what prices it will charge for them.
   • The government decides what methods of production to use and sets wages for workers.
   • The government provides many necessities like healthcare and education for free.

An Overview of Economic Systems

Examples of command economy:

• Ancient Egypt
• Medieval manor life
• Communism
• Currently, Cuba and North Korea

An Overview of Economic Systems

Real World Economies

• Most economies in the real world are mixed. They combine elements of command, traditional, and market systems.
  • 🇺🇸 The U.S. economy is positioned toward the market-oriented end of the spectrum.
  • Many countries in Europe 🇪🇺 and Latin America, while primarily market-oriented, have a greater degree of government involvement in economic decisions than the U.S. economy.
  • China 🇨🇳 and Russia 🇷🇺, while they have moved more in the direction of having a market-oriented system, remain closer to the command economy end of the spectrum

Regulations: The Rules of the Game

• There is no such thing as an absolutely free market.
• Regulations always define the “rules of the game” in the economy.
• Economies that are primarily market-oriented have fewer regulations—ideally just enough to maintain an even playing field for participants.
• Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval.

The Rise of Globalization

• Globalization - the trend in which buying and selling in markets have increasingly crossed national borders.

• Exports - the goods and services that a nation produces domestically and sells abroad.

• Imports - the goods and services that are produced abroad and then sold domestically.

• Gross domestic product (GDP) - measures the size of total production in an economy.

Reference

Shapiro, D.; MacDonald, D.; Greenlaw, S. A. (2022). Principles of Economics 3^e. OpenStax.

Chapter 1